When I pored through the findings from the Royal Commission, my heart sank when I read the recommendations in relation to the mortgage broking industry. If adopted (which is not guaranteed), the recommendations will wreak havoc on the entire industry and undoubtedly see many small mortgage broking businesses fold. It is also very bad news for consumers and, in my view, a huge win to the banks. I strongly believe it is a terrible policy.

The mortgage broking industry has grown over the last 20 years and, overall, this has meant that consumers are better off. The broking industry has created a fluid market with borrowers far more inclined to move between lenders. This has led to increased competition; banks have created more innovative and flexible products, second tier lenders have found niche’s in the market and provided loans for those who previously were unable to qualify. The broking industry has created a much more even playing field between borrower and lender.

Mortgage brokers provide a service to both the banks and the consumers. For the consumer, the broker provides technical advice based on the individual clients situation and is able to recommend an appropriate product to suit those needs. They also act as a broker, sourcing the best available loans on the market. It is not as simple as finding the lowest rate, many other factors determine the best loan for an individual.

Mortgage brokers also perform a service for the banks. They undertake much of the administration burden (this also helps consumers), the most onerous of which is the collection and compilation of financial information. They also act as a sales force for the banks.

Currently, the banks pay for this service. If a client goes directly to the bank, they pay the same rate as if the mortgage broker introduced client. There is no hidden cost to the consumer. There is good reason for this; the cost to the bank of attracting and on-boarding a new client is approximately what they pay the mortgage broker.

The recommendation of the Royal Commission is to reverse this model. Instead of the bank paying for the intermediary role that benefits both bank and borrower, they would like the consumer to pay. I think it is likely that most consumers won’t pay this cost, despite the fact that they are likely to benefit. The size of the broking industry is likely to decrease dramatically.

It is possible that we will see most borrowers review their lending arrangements far less regularly, we will see a far less fluid market, and this will lead to less competition and a worse result for most borrowers. There is a clear winner in all of this, and that is the banks.

I’m hoping that whichever Party wins the next election, they consider the likely effect of accepting the recommendations in relation to mortgage brokers because, in my view, the recommendation stinks!